Opinions on subjects of the day mainly as it pertains to common sense suggestions in improving the quality of life of all who are fortunate to live in this serendipitous island of Sri Lanka.

Saturday, February 28, 2009

Finance Company failures - more on the way

‘Kalpanakaranna’; savers in Sri Lanka use different modes to place their nest eggs. Of course there are the Bank Savings accounts and the National Savings Bank, which have given interest rates well below the rates of inflation which have resulted in most of the middle class eroding their principal. Hitherto they have been safe from collapse as the Banks can lend the money thus deposited at high rates of interest to make profits and thereby strengthen their balance sheets and capital base.

Those who consider themselves wiser, have invested their money in regulated and unregulated Finance companies because the rates of interest offered are higher. There is no real difference between the two except that there are certain guidelines the regulated once have to adhere to, and in that respect pay a slightly lower rate of interest to the savers. Many as we have seen have invested their funds in Sakvithi and their ilk and Golden Key (technically this is a credit card company and not a finance company) because of the stellar rates of interest offered. Does this saver realize that along with high rates of interest go higher risk of failure?

Surely the principal of investing is that higher the expected return therewith goes a higher level of risk of losing one’s money, and hence investment advisers recommend a diversification of one’s portfolio to take risk into account. Those who have now lost money are resorting to the courts for redress, because of the element of trust placed on the enterprise to safeguard one’s funds has been broken.

Needless to say if there is proven fraud, and the law has some redress, then the normal legal procedures should take place to hold those responsible accountable. However that does not for a moment mean that one can get one’s money back.

The investor also must be rational. How can anyone today earn a rate of return above 30% in order to pay the depositor that amount as interest? It is just not possible on the scale of the alleged Rs28B, which is the sum of the depositors funds. One must be a super genius to earn that return on that amount of money. Is it any wonder that this company failed? It did not fail earlier as it should over three years ago, because the management delayed the inevitable, by unethical means to cover the losses as they saw their unrealistic promises evaporate.Admitting a loss in a company of this nature is tantamount to a run on the bank. So they were caught up between a rock and a hard place. They just continued to operate until the funds ran out, as some high profile people withdrew large sums of ill-gotten gains just before the collapse.

This is not the first time it has happened nor will it be the last and there are still more collapses in the offing. Just think again (kalpanakaranna) All companies who are offering high interest are in trouble, because they just cannot earn that themselves. Property on which some of the investments were made are falling in value, leases on which some of the investments are made are not being paid because the lessees are not earning enough to make the lease payment. They have all gone cap in hand to the Central Bank for help. Short of printing money, the Central Bank cannot help as we are all caught up in the world economic crisis whether the Government wants to admit it or not.

Lets just then look ahead and plan our strategy of how to cope with the fall out of the failure of another 10 Finance Companies within the next six months. People will lose their savings, consumption will decrease, they will keep their remaining funds in Banks or under the pillow, or the rich will keep it in overseas banks. What does this mean for the economy? Very serious stagflation, with no growth, no money for growth, unemployment and substantially reduced economic activity as people will not have money to buy what is produced affecting even the most productive enterprises.

I continue to maintain as I have done in the past, that we have leaders without the intellectual capacity to understand the problems we are facing, only basking in the glow of a military victory whose costs we are yet to fully understand, and the country is going to face a collapse of a magnitude hitherto unseen.

It is not too late to remedy this, if the powers are able to realize and stave off the impending collapse. It does not take a rocket scientist to prescribe what is needed to stabilize the markets. Helping the productive enterprises, the elimination of wastage, and prudent bribe free investments in infrastructure. Immediate action to improve international reaction to the deteriorating Human Rights record is also a must. Confidence to invest will return both locally and from international investors both private and government. We are not and cannot be isolated from the outside world as long as we have overseas remittances as the principal source of foreign exchange.